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REVERSAL OF FORTUNE IN THE SOCIAL SECURITY SYSTEM (2014)

By Scott B. Elkind, Esq.

To understand how the future of Social Security is predicted, you need to know how the program is structured and accounted. As Social Security is a multigenerational program, it is calculated using a 75-year window. Although much can change during that span of time, key variables change slowly or not at all. Currently, the Social Security reserves are set to expire in 2033, at which time benefits would be reduced to 75% if no new revenues are legislated.

A new proposal to close this gap would raise the payroll tax from 12.4% to 15.9% for workers earning $50K or more each year, resulting in a minimum tax increase of $900 – $2,100/year (for wage earners at the maximum tax cap at $120K/year).

Unknown to many people, the Social Security tax is extraordinarily regressive as higher wage earners are not taxed on earnings in excess of $120K per year. For this reason, a person earning $250K only pays only a cumulative 5.9% payroll tax on those earnings which is less than half the rate the person earning $50K is paying. Even with this glaring disparity, 83% of all wages are subject to the Social Security payroll taxation.

A second proposal would increase the $120K cap to make the payroll tax less regressive. The number proposed is $241,600 which would mean a tax increase of $7,600 for top earners and employers paying their share of payroll tax. Such an increase would have unavoidable consequences in terms of employee hiring and compensation. Even with this increase, it would only cover 30% of the shortfall. Elimination of the payroll cap in its entirety would only result in alleviating 45% of the problem. Given the current employment problems, this change may not be viable.

In the past, a proposed 1% income tax increase dedicated solely to Social Security would close the gap in perpetuity. Congress does not have the political courage to enact such a sweeping change.

A recent Pew poll of “steadfast conservatives” oppose any reduction in promised benefits to be paid by Social Security. Further, there is no “generational” effect as 61% of young adults (ages 18 – 29) are against Social Security cuts as well.

Despite this gloomy outlook, there is some positive news that has occurred. The Medicare trust fund solvency has now been extended to 2030. . The Medicare adjustment came as a result of a recent slowdown in Medicare spending which will be improved by impact of enacted legislation which further cuts these costs. This improvement is only a temporary effect as 70M people are expected to qualify for benefits by 2030 with the unavoidable “graying” of America. The bad news continues with the Social Security Disability (SSD) funds whose reserves deplete in 2025.

There is one new variable which cannot be accounted for yet. The effects of the current economic downturn and employment situation have not yet come to roost. 45% of U.S. workers do not have full-time employment. This “underemployment” problem will cause a drastic reduction in Social Security payroll tax for years to come if not corrected.

Overall, there is no rosy picture to paint and Congress still fails to act despite all the clear warnings given.

Posted in Social Security Disability Benefits | Tagged , , , |

 

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